Daily Market Commentary

Tuesday, 27 March 2018 - Market Commentary

Nick Parsons

Tuesday 27 March

Great British Pound

The British Pound had a decent start to the week, even if its performance against the US Dollar gives a much-exaggerated picture of its overall strength. GBP/USD opened around 1.4135 and, along with most other currencies, rose steadily and without interruption through the day. By lunchtime in New York, the pair had reached a best level around 1.4245; its highest since the day of the US non-farm payroll figures back on February 2nd. The seven-tenths of a percent increase for GBP/USD compares with 0.5% for GBP/CAD and 0.3% for GBP/AUD, whilst GBP/EUR and GBP/NZD were little changed on the day. The overnight session in Asia has been very quiet indeed: just 15 pips separated the high and low of GBP/USD and no currency pair is more than 0.2% away from last night’s close.

Latest figures show that mortgage approvals fell 11% m/m in February to 38,120, well below consensus expectations for around 39k. UK Finance who compile the data said more home-owners were seeking remortgaging deals ahead of expected further interest rate rises by the Bank of England later this year. “We are also seeing a continuing rise in credit card spending, reflecting the growing number of transactions carried out using cards, while other forms of borrowing such as overdrafts continue to fall.” Net credit card lending amounted to 309 million pounds last month, down slightly from a net increase of 325 million pounds in January. As for house prices, Hometrack today reports price growth in London has hit a seven-year low with prices falling in almost half of all London postcodes, while the market in cities further north is “powering ahead”. The average price of a home in London is £487,900. Edinburgh is enjoying the fastest growth at 8 per cent in the year to February to £277,300. This is followed by 7.8 per cent in Liverpool to £115,700 and 7.7 per cent in Birmingham to £155,600.

On Brexit, a new report from credit ratings agency Moody’s says the UK-EU agreement “provides clarity that is credit positive for a broad range of UK issuers because it extends the narrow time frame that is available to shape and implement a new trade agreement and regulatory regimes with the EU until existing common rules cease to apply. It also buys the UK limited time to negotiate free trade agreements (FTAs) with other countries. However, the agreement remains conditional on the UK and the EU overcoming other challenges, such as the need to find a solution that prevents the creation of a hard border between Ireland and Northern Ireland. Until a conclusive final agreement is reached, uncertainty over the terms of the UK’s future long-term relationship with the EU will persist, weighing on the operating environment for UK issuers and hampering corporate investment.” GBP/USD opens in Europe this morning in the low-1.42’s with GBP/EUR in the mid-1.14’s.

US Dollar (USD)

GBP/USD expected range: 1.4135 – 1.4270

The US Dollar had a bad start to the week, falling against every one of the major currencies we follow closely here. Its index against a basket of major currencies tumbled from 89.05 to 88.55; its lowest level since February 16th. The Dollar’s smallest loss (-0.2%) came against the CAD but mostly it was down between seven and nine-tenths of a percent as the stock market rallied sharply and fears of a ‘Black Monday’ for global equities proved both alarmist and misplaced. Indeed, a 670 point rally for the DJIA was its best day since August 2015 whilst for the S&P 500 index, 20 stocks rose for every one which fell. Overnight in Asia, FX markets have been very quiet, and the USD has stabilised around Monday’s closing level.

US Treasury Secretary Steven Mnuchin told Fox News that he’s “cautiously hopeful” that China will reach a deal to avoid tariffs on $50 billion of U.S. exports, and investors are coming round to the view that President Trump’s opening gambits on tariffs are merely the headline starting point for a series of concessions. Over the weekend, the US Administration reportedly sent a letter from US Treasury Secretary Mnuchin and Trade Representative Lighthizer to China seeking reductions of Chinese tariffs on US autos, more access to China''s financial sector and more purchases of US semiconductors but there were also reports that that South Korea would be exempt from US steel tariffs in a revision of the bilateral trade pact between the two countries.

A report from S&P Global Ratings said, “President Trump’s long-threatened package of trade sanctions on China has landed, but a trade war isn’t yet inevitable. In general, the threatened tariffs and investment restrictions on China won’t likely cause deep pain to the Chinese economy, nor will they have a material impact on corporate borrowers in either country… Preliminary analysis shows that the overall impact on Chinese corporates and banks will be contained because the US represents only about 15% of China’s exports, and China’s domestic activity now drives its economic growth rather than exports. The $50 billion-$60 billion targeted by potential tariffs could affect up to 10%-12% of Chinese imports to the US.” Later today we’ll see the extent to which recent sharp declines in the equity market have impacted consumer confidence and we’ll also get the Richmond Fed’s manufacturing index. The USD index opens in Europe this morning at 88.60.

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